Balance transfer may be a fixed period scheme

Bhubaneswar's Urmimala Aich is a self-confessed shopaholic. The salary from a part-time job of this post-graduation student is not enough to back her long shopping list. So, when a couple of leading banks approached her for a credit card, Aich lapped the opportunity.

“I was concerned; I had to quit my job between February and April for my exams," she says.

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When you aren't able to clear your entire credit card bill in the 45-50 day billing period, you are levied an interest on the unpaid amount of up to 40 per cent. Aich is now worried as she hasn't been able to pay the entire amount in the past three months.

Two weeks back, Aich got a text message from a foreign bank asking her to “transfer high interest balances on to their credit card at a lower rate". On checking, she found she was being offered an interest rate of 1.49 per cent every month for 12 months. Annual interest rate of 17.88 per cent. Whereas, the private bank was charging 21 per cent, extra 3.21 per cent.

While Aich has already started the process of balance transfer, she is not aware of the other charges/clauses clubbed with the rate of interest on instalment.

Sample this: Aich requested for a transfer of Rs 30,000. However, as she had some balance on the foreign bank's card (of Rs 18,000). She was allowed to transfer Rs 22,000. So, she first needs to cough up Rs 7,000 at the time of transferring the balance.

She will have to pay a processing fee of Rs 99 (for one year's transfer) and service tax of 12.30 per cent of the processing fee, that is, Rs 12.17. Most importantly, She will have to pay a fixed equated monthly instalment (EMI). In this case, it will start with Rs 2,056 for the first month, Rs 2,053 for the second month, Rs 2,049 for the third month and so on.

However, for three (processing fee of 2.50 per cent of the amount transferred and service tax) and six months (processing fee of one per cent of the amount transferred and service tax), Aich will have to pay five per cent of Rs 22,000 every month for in the first two and five months, respectively. And pay the remaining in the last one month. Many banks insist on repaying in six months even if they have a longer tenure.

Typically, 85 per cent of your credit limit is transferred. And it is treated as an unsecured loan. If you do not pay up in the given time frame, the interest levied goes up manifold on the back of a daily penalty charge.

According to Shyamal Saxena, head, retail banking, at Standard Chartered Bank, credit cardholders regularly transfer balances to take advantage of the interest rate differential. And new card customers are informed about it.

This is a sales pitch to generate more income, typically from 'rotators'. Rotators as the name suggests, rotate their credit card balance every month by paying the minimum stipulated amount or a little more than that. “In market conditions like now, banks earn a lot of high interest income from such customers," says a official at HDFC Bank.

But, he discourages individuals to get into this routine as the low interest rate is used to lure you only for a fixed period. Most banks allow the EMI payment for three to six months. Only in rare cases it is allowed for 9 or 12 months and there are chances they stop the scheme midway.

Financial planners feel if it is a one-time balance accumulation on your card and you pay regularly otherwise, opting for this scheme may make sense. But, those who are habitual rotators tend to keep rolling over their balances even for a penalty. For such individuals, this does not make sense.